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A home-grown solution for Latin America’s water crisis

By Luis Alberto Moreno*

As delegates gathered at the IV World Water Forum in Mexico City earlier this month, many were asking whether the private sector still has a role to play in solving the critical sanitation problems of the developing world.

In Latin America this debate has been raging since the early 1990s. Critics of private sector involvement cite the well-publicized problems of water concessions in a few large South American cities as evidence that such ventures are doomed to fail. They also charge that the recent retreat of multinational water companies from some of the region’s countries shows that private investors are unwilling to shoulder the costs and risks of improving services for the poor.

These arguments fail to acknowledge the variety and dynamism of recent private participation in the water sector—and the benefits it has generated for cash-strapped public utilities and local governments. True, some concessions have not met expectations. Governments, regulators and investors are still learning how to reconcile social obligations with the need to recover costs and the reasonable expectation of making profits for providing a service. Ambiguous rules regarding tariffs and subsidies, political meddling and exchange rates crises have crippled otherwise viable arrangements. Some foreign companies have failed to adapt to local conditions, and in certain cases a lack of transparency and community participation has fueled opposition to private operators.

But for every failure, Latin America offers numerous instances of private ventures that are successfully meeting people’s drinking water and sanitation needs. In Brazil, 63 concessions serve 7 million people in small and medium-sized municipalities. Large cities in Honduras, Ecuador, Peru and Argentina rely on private water providers under a variety of contract and concession models. In Chile, private investors are underwriting the construction of billions of dollars in sewage treatment infrastructure—an area where the region is still woefully deficient.

Small-scale water companies thrive in virtually every Latin American country. In Colombia, more than 150 such enterprises provide water and sanitation services under contract to municipal governments. Most of these are small businesses located in remote rural areas. Paraguay and Bolivia have dozens of water entrepreneurs that use their own capital to build networks in communities not reached by public utilities. These providers are succeeding because they offer reliable services at competitive prices with the support of local governments and citizens.

Contrary to popular belief, private providers are not avoiding low-income areas.

In Guayaquil, Ecuador’s largest city, a private company has installed new water connections in 39,000 homes in marginal districts since 2001. The concession contract stipulated that expansion works should begin in Isla Trinitaria, a squatter settlement inhabited by 100,000 of the city’s poorest citizens. People who used to pay as much as US$3.50 per cubic meter for water poured into buckets or barrels by roving tanquero trucks now spend around US$.35 per cubic meter for water piped into their homes 24 hours a day.

Ten years ago Cartagena and Barranquilla, the two principal cities on Colombia’s Atlantic coast, were in a state of sanitary collapse. Nearly 1 million people lacked water service, and most of those who had it received water for only a few hours a day. Today 98 percent of the population in both cities has running water and nearly 90 percent have access to sewer lines, thanks to innovative “mixed capital” companies formed by their municipal governments. In this arrangement, the city owns a controlling stake in the water utility and secures financing for infrastructure projects. A private operator receives a minority stake and a contract to run the service under clear performance and coverage-expansion targets. The operator also has complete control over management, contracting and personnel decisions.

The arrangement allowed Cartagena and Barranquilla to bring world-class managers and technology to their water and sanitation services. Both companies have developed services tailored specifically to the needs of the low-income consumers that make up more than 80 percent of the population. Aguas de Cartagena, for example, uses customer service vans to reach poor areas not served by public transportation. Company representatives in these mobile offices accept cash and use customized billing software to manage thousands of individualized payment plans for customers who lack regular incomes. And because the company now collects payment on 92 percent of the services it bills (up from 45 percent in 1995), the city is able to meet debt service obligations on the US$240 million it has invested on water and sanitation improvements during the last decade.

This type of innovation is benefiting Latin America’s public sector providers as well. Public water utilities in cities as diverse as Managua, Santo Domingo, and Bogotá have recently turned to private contractors to improve their efficiency in areas such as repairs, metering and collections. Among the leaders in this trend is Sabesp, a state-controlled utility in São Paulo that serves 25 million customers, pays dividends to its shareholders and raises capital on the New York Stock Exchange. At the Inter-American Development Bank, we are offering financing instruments and technical assistance to help public utilities to take better advantage of private capital and expertise.

Finally, even as some multinational water companies are pulling out of the region to focus on other markets, a new generation of Latin American companies—both public and private—is stepping into their place. Successful providers from Colombia and Argentina are bidding on water contracts in Peru, for example, and local investors in several other countries are negotiating to acquire the assets of departing European firms.

Private investment is not a panacea for Latin America’s sanitation problems. More than 90 percent of the region’s population still depends on public utilities, and in the near term investors are not likely to provide the tens of billions of dollars that are needed to close the sanitation gap. But as they look for ways to extend drinking water and sewer services to the millions of citizens who still lack them, governments should leverage the experience and creativity of private providers on their home turf.

*Luis Alberto Moreno is president of the Inter-American Development Bank. A slightly different version of this article was originally published in the March 10, 2006, edition of the Wall Street Journal.